What Legal Challenges Might Cap the Adoption of Blockchain?

Many crucial legal challenges remain before blockchain is adopted broadly across these industries. If you want entirely automated trading services, you can visit websites like Bitcoinprime; here, you will get all the advanced bitcoin trading features. While the long-term benefits of the blockchain are clear, it still needs to be determined who will be able to make use of this technology.

More importantly, it will take time for countries worldwide to set transparent and predictable regulations on critical issues that would significantly impact its adoption in finance and tech industries: property rights, data security, and privacy, transfer obligations. In the meantime, parties should remain aware of and manage the technical, reputational, and financial risks that accompany blockchain adoption.

Blockchain will automatically create a digital record of transactions with every change of ownership recorded in every copy of the database. As a result, those who use blockchain can transfer their property more economically or efficiently than with traditional methods. But what happens if there’s a disagreement over the record? For example, in most jurisdictions, including those in the U.S., it matters whose signature appears on a digital document first (even if it was copied from someone else). Likewise, in many countries, including the U.S., it will matter who holds the original paper document.

Both of these issues become difficult or impossible when you have an electronic system that doesn’t rely on the pen to paper or a notary to witness your signature. But these are still fundamental ways people transfer property ownership in most countries worldwide, so any blockchain-based scheme for transferring property will run into these issues. Several questions still need to be answered, even in states that have been early adopters of blockchain technology. First, let’s find out what legal challenges might restrict the adoption of blockchain technology.

Taxation challenges

Under the U.S. federal income tax law, blockchain will be treated as a “taxable event” under which circumstances? While there are no specific regulations in the U.S. on when a digital transaction will be treated as an event that triggers taxation, could blockchain transactions be considered taxable? Recent changes in U.S. tax policy, such as FATCA and its domestic impact, made it clear that transferring cryptocurrency is subject to taxation by the Department of the Treasury.

In general, anyone who receives or pays money using a bank wire transfer or ACH transfer does not need to worry about late filing penalties. However, many crypto-holders and crypto-payment processors have reported getting taxed erroneously by IRS. In the blockchain scenario, finding the IRS rule-based treatment of digital currency transactions is much more challenging.

Bankability challenges

How would a bank treat many blockchain transactions sent via a specific firm? What is the difference between traditional banks agreeing to act as settlement agents and brokers for blockchain-based financial instruments and trading the securities? While banks do not have any problem setting up client accounts and providing services such as ACH transfer, wire transfer, or access to the interbank market, how would they act as a settlement agent in a blockchain world?

In this world, they will have to set up accounts for every entity participating in the central registry, which maintains transaction data records. The bankability challenges of blockchain are further evident as one moves into the realm of securities. For example, an issuer with its token will be considered a broker-dealer subject to the same rules that apply to traditional stock issuers. In addition, banks involved in trading those securities will have to register with the SEC as an Alternative Trading System (ATS) and follow a series of regulatory requirements to protect investors, combat fraud, and keep markets fair.

The settlement challenge of blockchain also manifests itself when we look at it from a regulatory and governance perspective. Blockchain facilitates peer-to-peer (P2P) transactions, which occur directly between two parties via online communication technology, eliminating intermediaries such as banks or brokers.

Adoption challenges

Will blockchain be adopted across all participants in a supply chain? What are the key factors behind this decision? How can firms enable blockchain adoption? Several companies are involved in the supply chain at various stages. Some companies may be using blockchain to complete and manage business transactions; others may rely on it for automation or process improvement. The most successful supply chains will leverage the strengths of blockchain while using existing proven technology to address any weaknesses.

There is no doubt that the adoption of blockchain will present significant challenges for companies and their information technology departments. Still, the benefits a common shared ledger could provide indicate that it is worth it.

Regulation challenges

Will regulators’ ability to oversee financial markets be hindered by blockchain? How can regulators ensure that markets are fair, transparent, and secure while preserving their ability to monitor transactions? Regulation in the U.S. already requires firms to protect personal information. Federal law states that people may not use personal information for any purpose other than the reason it was collected unless an exception applies. For businesses dependent on blockchain to comply with existing laws on data security, they must establish a proper system of recordkeeping and management of Blockchain transactions. Companies should also include compliance guidelines in their I.T. governance programs.

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